AMERISAFE, Inc. 2018 Form 10-K Summary
Business context and reporting period
AMERISAFE is a specialty workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The filing covers the fiscal year ended December 31, 2018, with comparisons to 2017 and 2016. The company operates through three insurance subsidiaries, each rated “A” (Excellent) by A.M. Best.
- More than 8,000 voluntary policyholders and more than 2,400 independent agencies at year-end.
- Voluntary business represented 96.8% of 2018 gross premiums written.
- Policy renewal rate on voluntary business the company elected to quote for renewal was 93.6%, versus 93.0% in 2017.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Gross premiums written | $351.7 million | $350.3 million | +0.4% |
| Net premiums written | $342.4 million | $341.4 million | +0.3% |
| Net premiums earned | $350.3 million | $346.2 million | +1.2% |
| Total revenues | $377.8 million | $375.2 million | +0.7% |
| Net investment income | $30.5 million | $29.3 million | +4.0% |
| Income before taxes | $87.6 million | $82.2 million | +6.5% |
| Net income | $71.6 million | $46.2 million | +55.0% |
| Diluted EPS | $3.71 | $2.40 | +54.6% |
| Net combined ratio | 82.9% | 84.7% | Improved 1.8 points |
| Return on average equity | 17.2% | 10.5% | Improved |
- The current accident-year loss ratio increased to 71.5% from 70.5%, but favorable prior-year development of $45.6 million reduced the reported net loss ratio to 58.5%, compared with 60.5% in 2017.
- The underwriting expense ratio increased to 23.2% from 22.8%.
- Net realized investment losses were $1.5 million, compared with $0.6 million in 2017. The company also recorded $2.1 million of net unrealized losses on equity securities following adoption of new accounting guidance.
- Cash flow from operating activities was $98.3 million, down from $130.8 million in 2017. Claims paid, net of reinsurance, were approximately $200.7 million.
- Year-end cash and cash equivalents were $40.3 million, investments were $1.125 billion, and total investments including cash were $1.166 billion.
- Gross loss and loss adjustment expense reserves were $798.4 million, including $691.2 million net of reinsurance recoverables. Reinsurance recoverables totaled $112.0 million, of which $42.1 million was unsecured.
- Shareholders’ equity was $409.8 million, down from $425.4 million, primarily reflecting shareholder dividends and a decline in accumulated other comprehensive income.
- The $20.0 million unsecured revolving credit facility had no outstanding borrowings or letters of credit at year-end and expires in December 2019.
Material changes versus the prior comparable period
- Profitability improved substantially, principally because income tax expense declined to $15.9 million from $36.0 million. The 2017 amount included a $12.6 million deferred tax charge from the Tax Act’s reduction of the corporate tax rate to 21%.
- Gross premiums were broadly stable after a $6.8 million increase from payroll audits and related adjustments offset a $5.2 million decline in annual voluntary policy premiums written during the period.
- Loss and loss adjustment expense incurred declined 2.1% to $204.9 million despite higher current accident-year losses, because favorable prior-year development increased to $45.6 million from $34.8 million.
- Gross reserves increased 3.4% to $798.4 million, primarily due to the 2018 accident year. Open claims increased to 5,190 from 4,982.
- Shareholders received $84.5 million of dividends in 2018, including a $3.50 per-share extraordinary dividend. The regular quarterly dividend increased to $0.22 per share from $0.20.
- No shares were repurchased in 2018. The company had $25.0 million remaining under its repurchase authorization.
Guidance, outlook, commentary, risks and unusual items
Management did not provide formal earnings or premium guidance. Management’s stated strategy is to maintain underwriting discipline through market cycles, expand market penetration selectively, pursue prudent geographic expansion, maintain capital strength, and use safety and claims management to support underwriting profitability.
- Management expects operating cash flow to fund claims, operating expenses, capital needs and holding-company expenses for at least the next 18 months.
- Insurance subsidiaries could pay up to $71.0 million in dividends to AMERISAFE in 2019 without prior regulatory approval, based on the prescribed statutory calculation.
- The 2019 reinsurance program includes 18 reinsurers, with coverage of up to $70.0 million per loss occurrence, subject to deductibles, retentions, limits and exclusions. Single-claimant coverage is limited to $10.0 million.
- Workers’ compensation reserves are highly judgmental and exposed to medical inflation, wage trends, litigation, regulatory changes, claim severity and development uncertainty. A 30% increase in selected paid and incurred loss development factors would increase the estimated net loss and DCC reserve by approximately $52.4 million, or 8.0%.
- The company writes relatively low-frequency, high-severity risks. Severe claims can materially affect accident-year results and reserve volatility.
- Key risks include workers’ compensation pricing cycles, competition, economic conditions affecting policyholder payrolls, investment market and interest-rate risk, cyber incidents, regulatory constraints, reinsurer credit risk, terrorism exposure, and potential inadequacy of loss reserves.
- The company is required to provide workers’ compensation terrorism coverage. The current reinsurance program provides limited terrorism protection, and the federal terrorism backstop is scheduled to expire December 31, 2020 unless extended or replaced.
- Management reported no material legal proceedings, no off-balance-sheet arrangements, effective disclosure controls and effective internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Most important facts an investor should verify
- Whether favorable prior-year reserve development of $45.6 million is sustainable and how current accident-year loss ratios develop.
- The adequacy of the $798.4 million gross reserve and the sensitivity of reserves to claim severity, medical inflation and loss-development assumptions.
- The collectability and collateralization of the $112.0 million of reinsurance recoverables, including the $42.1 million unsecured balance.
- Renewal pricing, policy payroll growth and premium trends in construction, trucking and other hazardous industries.
- The company’s ability to maintain an A.M. Best “A” rating and statutory capital levels while continuing extraordinary and regular dividends.
- Reinsurance renewal terms after the 2019 catastrophe layer expires on January 1, 2020, including coverage for terrorism and large single-claim losses.
- The effect of interest-rate movements on the investment portfolio, whose reported duration was 4.2 years and whose fixed-maturity fair value could decline materially if rates rise.